Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company is subject to corporate income taxes and the Texas margin tax. The Company and its subsidiaries, other than Viper, Viper LLC, Rattler and Rattler LLC, file a federal corporate income tax return on a consolidated basis. As discussed further below, Viper is a taxable entity for federal income tax purposes effective May 10, 2018, and as such files a federal corporate income tax return including the activity of its investment in Viper LLC. Subsequent to Rattler’s election to be treated as a corporation for federal income tax purposes effective May 24, 2019, Rattler is also a taxable entity and as such files a federal corporate income tax return including the activity of its investment in Rattler LLC. Viper’s and Rattler’s provision for income taxes is included in the Company’s consolidated income tax provision and, to the extent applicable, in net income attributable to the non-controlling interest.

The Tax Cuts and Jobs Act, a historic reform of the U.S. federal income tax statutes, was enacted on December 22, 2017. As of the completion of the Company’s financial statements for the year ended December 31, 2017, the Company had substantially completed its accounting for the effects of the enactment of the Tax Cuts and Jobs Act and with respect to those items for which the Company’s accounting was not complete, the Company made reasonable estimates of the effects on its deferred tax balances.

To account for the effects of the Tax Cut and Jobs Act, the Company remeasured its deferred tax assets and liabilities based on the federal income and state income tax rates at which they expected to reverse, which is generally a federal income tax rate of 21%. The enacted rate change resulted in a non-cash decrease of approximately $68 million to the Company’s income tax provision for the period ended December 31, 2017 and a corresponding reduction to the Company’s net noncurrent deferred tax liability balance as of December 31, 2017. At December 31, 2018, the Company completed its accounting for all of the enactment-date income tax effects of the Tax Cuts and Jobs Act and did not made any adjustments to the provisional amounts recorded December 31, 2017.

The Company’s effective income tax rates were 13.0% and 15.1% for the years ended December 31, 2019 and 2018, respectively. Total income tax expense for the year ended December 31, 2019 differed from amounts computed by applying the United States federal statutory tax rate to pre-tax income for the period primarily due to the revision of estimated deferred taxes recognized as a result of Viper’s change in tax status, and state income taxes net of federal benefit. Total income tax expense for the year ended December 31, 2018 differed from amounts computed by applying the United States federal statutory rate to pre-tax income for the period primarily due to the impact of deferred taxes recognized as a result of Viper’s change in tax status, net income attributable to the noncontrolling interest, and state income taxes net of federal benefit.



	Year Ended December 31,
	2019		2018		2017
	(In millions)
Current income tax provision (benefit):
Federal	$	—	$	—	$	—
State	—		—		—
Total current income tax provision (benefit)	—		—		—
Deferred income tax provision (benefit):
Federal	40		160		(21		)
State	7		8		1
Total deferred income tax provision (benefit)	47		168		(20		)
Total provision for (benefit from) income taxes	$	47	$	168	$	(20	)



	Year Ended December 31,
	2019			2018			2017
	(In millions)
Income tax expense at the federal statutory rate⁽¹⁾	$	76		$	234		$	174
Impact of nontaxable noncontrolling interest	—			(5		)	(12		)
Income tax benefit relating to change in statutory tax rate	—			—			(68		)
State income tax expense, net of federal tax effect	6			8			3
Non-deductible compensation	4			5			13
Change in valuation allowance	—			—			(127		)
Deferred taxes related to change in Viper LP's tax status	(42		)	(73		)	—
Other, net	3			(1		)	(3		)
Provision for (benefit from) income taxes	$	47		$	168		$	(20	)



	December 31,
	2019			2018
	(In millions)
Deferred tax assets:
Net operating loss and other carryforwards	$	453		$	155
Stock based compensation	7			7
Viper LP's investment in Viper LLC	134			94
Other	11			9
Deferred tax assets	605			265
Valuation allowance	(7		)	(14		)
Deferred tax assets, net of valuation allowance	598			251
Deferred tax liabilities:
Oil and natural gas properties and equipment	2,275			1,825
Midstream investments	50			67
Derivative instruments	6			47
Rattler LP's investment in Rattler LLC	8			—
Other	3			—
Total deferred tax liabilities	2,342			1,939
Net deferred tax liabilities	$	1,744		$	1,688

The Company had net deferred tax liabilities of approximately $1.7 billion at December 31, 2019 and 2018. On November 29, 2018, the Company completed its acquisition of Energen. For federal income tax purposes, the acquisition was a tax-free merger whereby the Company’s tax basis in Energen assets and liabilities was unaffected by the acquisition. As of December 31, 2018, the Company recorded a deferred tax liability of $1.4 billion associated with the acquired assets, which includes deferred tax assets related to tax attributes acquired from Energen. As of December 31, 2019, the Company has completed its purchase price allocation for the acquisition, including an increase of $23 million to the deferred tax liability as a result of adjustments to fair value of the acquired assets.

The Company incurred a tax net operating loss ("NOL") in the current year due principally to the ability to expense certain intangible drilling and development costs under current law. There is no tax refund available to the Company as a result of its loss, nor is there any current federal income tax payable. At December 31, 2019, the Company had approximately $400 million of federal NOLs expiring in 2032 through 2037 and $1.3 billion of federal NOLs with an indefinite carryforward life, including NOLs acquired from Energen. The Company principally operates in the state of Texas and is subject to Texas Margin Tax, which currently does not include an NOL carryover provision. The Company’s federal tax attributes acquired from Energen are subject to an annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended, which relates to tax attribute limitations upon the 50% or greater change of ownership of an entity during any three-year look back period. The Company believes that the application of Section 382 will not have an adverse effect on future usage of the Company’s NOLs and credits, including federal tax attributes acquired from Energen. The Company’s minimum tax credits, including those acquired from Energen, are classified as $19 million current and $19 million noncurrent income tax receivables on the balance sheet.

As of December 31, 2019, the Company has a valuation allowance of $7 million primarily related to certain state NOL carryforwards which the Company does not believe are realizable as it does not anticipate future operations in those states. Management’s assessment at each balance sheet date included consideration of all available positive and negative evidence including the anticipated timing of reversal of deferred tax liabilities. Management believes that the balance of the Company’s NOLs are realizable to the extent of future taxable income primarily related to the excess of book carrying value of properties over their respective tax bases. As of December 31, 2019, management determined that it is more likely than not that the Company will realize its remaining deferred tax assets.

through partnership to that of a taxable entity, which change became effective on May 10, 2018. The transactions undertaken in connection with the change in Viper’s tax status were not taxable to the Company. Subsequent to Viper’s change in tax status, Viper’s provision for income taxes for the periods ended December 31, 2018 and 2019 are based on its estimated annual effective tax rate plus discrete items. As such, Viper’s provision for income taxes is included in the Company’s consolidated financial statements and to the extent applicable, in net income attributable to the non-controlling interest.

At December 31, 2019, the Company’s net deferred tax liabilities include a deferred tax asset of approximately $134 million related to Viper’s investment in Viper LLC, approximately $115 million of which was recorded as a result of Viper’s change in tax status. Under federal income tax provisions applicable to Viper’s change in tax status, Viper’s basis for federal income tax purposes in its interest in Viper LLC consisted primarily of the sum of Viper’s unitholders’ tax bases in their interests in Viper on the date of the tax status change. Viper prepared its best estimate of the tax basis in Viper LLC for purposes of Viper’s income tax provision for the period of the change, but information necessary for Viper to finalize its determination was not available until unitholders’ tax basis information was fully reported and Viper finalized its federal income tax computations for 2018. Based on such finalized information as of the third quarter 2019, Viper revised its estimate of the difference between its tax basis and its basis for financial accounting purposes in Viper LLC on the date of the tax status change, resulting in deferred income tax benefit of $42 million included in the Company’s consolidated income tax provision for the year ended December 31, 2019. As of December 31, 2019, Viper has federal net operating loss carryforwards of approximately $38 million which may be carried forward indefinitely to offset future taxable income.

As discussed further in Note 5—Rattler Midstream LP, on May 28, 2019, Rattler completed its initial public offering. Even though Rattler is organized as a limited partnership under state law, Rattler is subject to U.S. federal and state income tax at corporate rates, subsequent to the effective date of Rattler’s election to be treated as a corporation for U.S. federal income tax purposes. As such, Rattler’s provision for income taxes is included in the Company’s consolidated financial statements and to the extent applicable, in net income attributable to the non-controlling interest.

At December 31, 2019, the Company’s net deferred tax liabilities include a deferred tax liability of approximately $8 million related to Rattler’s investment in Rattler LLC. Subsequent to the deemed formation of Rattler LLC as a partnership for federal income tax purposes upon Rattler’s IPO, deferred taxes are no longer provided on the underlying assets and liabilities of Rattler LLC but are provided on the difference between Rattler’s basis for financial accounting purposes and basis for federal income tax purposes in its investment in Rattler LLC. Rattler incurred an NOL in the current year due principally to Rattler LLC’s tax deductions for accelerated depreciation, which exceeded its other items of taxable income. At December 31, 2019, Rattler has federal net operating loss carryforwards of approximately $1 million which may be carried forward indefinitely to offset future taxable income.



	December 31,
	2019			2018
	(in millions)
Balance at beginning of year	$	7		$	—
Increase resulting from tax positions acquired	—			7
Increase resulting from prior period tax positions	—			—
Increase resulting from current period tax positions	—			—
Balance at end of year	7			7
Less: Effects of temporary items	(5		)	(5		)
Total that, if recognized, would impact the effective income tax rate as of the end of the year	$	2		$	2

The Company’s federal and state income tax returns for 2012 through the current tax year remain open and subject to examination by the IRS and major state taxing jurisdictions. Energen is currently under IRS examination of its federal consolidated income tax returns for 2014 and 2016. Accordingly, it is reasonably possible that significant changes to the reserve for uncertain tax positions may occur as a result of various audits and the expiration of the statute of limitations. Although the timing and outcome of tax examinations is highly uncertain, the Company does not expect the change in unrecognized tax benefit within the next 12 months would have a material impact to the financial statements.